Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - IASIS Healthcare LLCFinancial_Report.xls
EX-31.2 - EX-31.2 - IASIS Healthcare LLCd296086dex312.htm
EX-31.1 - EX-31.1 - IASIS Healthcare LLCd296086dex311.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            .

COMMISSION FILE NUMBER: 333-117362

 

 

IASIS HEALTHCARE LLC

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   20-1150104
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

DOVER CENTRE

117 SEABOARD LANE, BUILDING E

FRANKLIN, TENNESSEE

  37067
(Address of principal executive offices)   (Zip Code)

(615) 844-2747

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x      Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

As of February 14, 2012, 100% of the registrant’s common interests outstanding (all of which are privately owned and are not traded on any public market) were owned by IASIS Healthcare Corporation, its sole member.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

     1   

Item 1. Financial Statements

     1   

Condensed Consolidated Balance Sheets — December 31, 2011 (Unaudited) and September 30, 2011

     1   

Condensed Consolidated Statements of Operations (Unaudited) — Quarters Ended December  31, 2011 and 2010

     2   

Condensed Consolidated Statement of Equity (Unaudited) — Quarter Ended December 31, 2011

     3   

Condensed Consolidated Statements of Cash Flows (Unaudited) — Quarters Ended December  31, 2011 and 2010

     4   

Notes to Condensed Consolidated Financial Statements (Unaudited)

     5   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     22   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     37   

Item 4. Controls and Procedures

     38   

PART II. OTHER INFORMATION

     39   

Item 1. Legal Proceedings

     39   

Item 1A. Risk Factors

     39   

Item 6. Exhibits

     40   

 

i


Table of Contents

PART I.

FINANCIAL INFORMATION

 

Item 1. Financial Statements

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)

 

September 30, September 30,
       December 31,
2011
       September 30,
2011
 
       (Unaudited)           

ASSETS

         

Current assets

         

Cash and cash equivalents

     $ 83,996         $ 147,327   

Accounts receivable, less allowance for doubtful accounts of $214,040 and $185,481 at December 31, 2011 and September 30, 2011, respectively

       303,597           277,932   

Inventories

       69,185           68,330   

Deferred income taxes

       39,153           40,415   

Prepaid expenses and other current assets

       74,103           72,914   
    

 

 

      

 

 

 

Total current assets

       570,034           606,918   

Property and equipment, net

       1,164,487           1,167,920   

Goodwill

       807,009           808,651   

Other intangible assets, net

       31,454           32,779   

Other assets, net

       76,056           63,509   
    

 

 

      

 

 

 

Total assets

     $ 2,649,040         $ 2,679,777   
    

 

 

      

 

 

 

LIABILITIES AND EQUITY

         

Current liabilities

         

Accounts payable

     $ 103,737         $ 92,805   

Salaries and benefits payable

       47,076           58,379   

Accrued interest payable

       9,522           30,045   

Medical claims payable

       75,357           85,723   

Other accrued expenses and other current liabilities

       86,786           100,830   

Current portion of long-term debt and capital lease obligations

       13,855           14,020   
    

 

 

      

 

 

 

Total current liabilities

       336,333           381,802   

Long-term debt and capital lease obligations

       1,861,545           1,864,749   

Deferred income taxes

       131,465           131,018   

Other long-term liabilities

       97,726           78,441   

Non-controlling interests with redemption rights

       97,594           95,977   

Equity

         

Member’s equity

       114,565           118,000   

Non-controlling interests

       9,812           9,790   
    

 

 

      

 

 

 

Total equity

       124,377           127,790   
    

 

 

      

 

 

 

Total liabilities and equity

     $ 2,649,040         $ 2,679,777   
    

 

 

      

 

 

 

See accompanying notes.

 

1


Table of Contents

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands)

 

September 30, September 30,
       Quarter Ended
December 31,
 
       2011      2010  

Net revenue

       

Acute care revenue

     $ 543,214       $ 471,688   

Less: Provision for bad debts

       (70,279      (59,614
    

 

 

    

 

 

 

Acute care revenue, net

       472,935         412,074   

Premium revenue

       150,738         202,192   
    

 

 

    

 

 

 

Net revenue

       623,673         614,266   

Costs and expenses

       

Salaries and benefits (includes stock-based compensation of $500 and $496, respectively)

       223,964         189,913   

Supplies

       84,170         76,436   

Medical claims

       124,245         171,334   

Rentals and leases

       12,266         11,166   

Other operating expenses

       113,983         97,126   

Medicaid EHR incentive payments

       (6,677      —     

Interest expense, net

       34,940         16,877   

Depreciation and amortization

       28,534         24,046   

Management fees

       1,250         1,250   
    

 

 

    

 

 

 

Total costs and expenses

       616,675         588,148   

Earnings from continuing operations before gain on disposal of assets and income taxes

       6,998         26,118   

Gain on disposal of assets, net

       240         345   
    

 

 

    

 

 

 

Earnings from continuing operations before income taxes

       7,238         26,463   

Income tax expense

       3,605         9,189   
    

 

 

    

 

 

 

Net earnings from continuing operations

       3,633         17,274   

Loss from discontinued operations, net of income taxes

       (48      (3,208
    

 

 

    

 

 

 

Net earnings

       3,585         14,066   

Net earnings attributable to non-controlling interests

       (2,232      (2,320
    

 

 

    

 

 

 

Net earnings attributable to IASIS Healthcare LLC

     $ 1,353       $ 11,746   
    

 

 

    

 

 

 

See accompanying notes.

 

2


Table of Contents

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENT OF EQUITY (UNAUDITED)

(In Thousands)

 

September 30, September 30, September 30, September 30,
       Non-controlling
Interests with
Redemption
Rights
     Member’s
Equity
     Non-
controlling
Interests
     Total
Equity
 
 

Balance at September 30, 2011

     $ 95,977       $ 118,000       $ 9,790       $ 127,790   

Net earnings

       2,186         1,353         46         1,399   

Distributions to non-controlling interests

       (3,279      —           (24      (24

Acquisition related adjustments to redemption value of non-controlling interests with redemption rights

       (1,720      —           —           —     

Other

       (794      —           —           —     

Stock-based compensation

       —           500         —           500   

Other comprehensive income

       —           (70      —           (70

Income tax benefit from exercised employee stock options

       —           6         —           6   

Adjustment to redemption value of non-controlling interests with redemption rights

       5,224         (5,224      —           (5,224
    

 

 

    

 

 

    

 

 

    

 

 

 
 

Balance at December 31, 2011

     $ 97,594       $ 114,565       $ 9,812       $ 124,377   
    

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes.

 

3


Table of Contents

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

 

September 30, September 30,
       Quarter Ended
December 31,
 
       2011      2010  

Cash flows from operating activities

       

Net earnings

     $ 3,585       $ 14,066   

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

       

Depreciation and amortization

       28,534         24,046   

Amortization of loan costs

       1,902         810   

Stock-based compensation

       500         496   

Deferred income taxes

       3,067         2,539   

Income tax benefit from stock-based compensation

       6         —     

Income tax benefit from parent company interest

       —           2,240   

Fair value change in interest rate hedges

       (845      —     

Amortization of other comprehensive loss

       1,234         —     

Gain on disposal of assets, net

       (240      (345

Loss from discontinued operations, net

       48         3,208   

Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:

       

Accounts receivable, net

       (26,860      (8,334

Inventories, prepaid expenses and other current assets

       (2,839      (5,956

Accounts payable, other accrued expenses and other accrued liabilities

       (40,766      (26,048
    

 

 

    

 

 

 

Net cash provided by (used in) operating activities — continuing operations

       (32,674      6,722   

Net cash used in operating activities — discontinued operations

       (27      (240
    

 

 

    

 

 

 

Net cash provided by (used in) operating activities

       (32,701      6,482   
    

 

 

    

 

 

 

Cash flows from investing activities

       

Purchases of property and equipment, net

       (24,357      (15,360

Cash paid for acquisitions, net

       602         (1,880

Change in other assets, net

       1,171         515   
    

 

 

    

 

 

 

Net cash used in investing activities

       (22,584      (16,725
    

 

 

    

 

 

 

Cash flows from financing activities

       

Payment of debt and capital lease obligations

       (3,745      (1,933

Debt financing costs incurred

       (998      —     

Distributions to non-controlling interests

       (3,303      (3,089
    

 

 

    

 

 

 

Net cash used in financing activities

       (8,046      (5,022
    

 

 

    

 

 

 

Change in cash and cash equivalents

       (63,331      (15,265

Cash and cash equivalents at beginning of period

       147,327         144,511   
    

 

 

    

 

 

 

Cash and cash equivalents at end of period

     $ 83,996       $ 129,246   
    

 

 

    

 

 

 

Supplemental disclosure of cash flow information

       

Cash paid for interest

     $ 53,182       $ 26,514   
    

 

 

    

 

 

 

Cash paid for income taxes, net

     $ 13       $ 5   
    

 

 

    

 

 

 

Supplemental disclosure of non-cash investing and financing activities

       

Capital lease obligations resulting from acquisition

     $ —         $ 7,708   
    

 

 

    

 

 

 

See accompanying notes.

 

4


Table of Contents

 

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements as of and for the quarters ended December 31, 2011 and 2010, reflect the financial position, results of operations and cash flows of IASIS Healthcare LLC (“IASIS” or the “Company”). The Company’s sole member and parent company is IASIS Healthcare Corporation (“Holdings” or “IAS”).

IASIS owns and operates acute care hospitals primarily located in high-growth urban and suburban markets. At December 31, 2011, the Company owned or leased 18 acute care hospital facilities and one behavioral health hospital facility, with a total of 4,365 licensed beds, located in seven regions:

 

   

Salt Lake City, Utah;

 

   

Phoenix, Arizona;

 

   

Tampa-St. Petersburg, Florida;

 

   

five cities in Texas, including Houston and San Antonio;

 

   

Las Vegas, Nevada;

 

   

West Monroe, Louisiana; and

 

   

Woodland Park, Colorado.

The Company also owns and operates Health Choice Arizona, Inc. (“Health Choice” or the “Plan”), a Medicaid and Medicare managed health plan in Phoenix, Arizona.

The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The condensed consolidated balance sheet of the Company at September 30, 2011, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments (consisting of normal recurring items) necessary for a fair presentation of results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year.

Principles of Consolidation

The unaudited condensed consolidated financial statements include all subsidiaries and entities under common control of the Company. Control is generally defined by the Company as ownership of a majority of the voting interest of an entity. In addition, control is demonstrated in most instances when the Company is the sole general partner in a limited partnership. Significant intercompany transactions have been eliminated.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying unaudited condensed consolidated financial statements and notes. Actual results could differ from those estimates.

 

5


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no impact on the Company’s total assets or total liabilities and equity.

General and Administrative

The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as “general and administrative” by the Company would include the IASIS corporate office costs, which were $12.3 million and $10.0 million for the quarters ended December 31, 2011 and 2010, respectively.

Subsequent Events Consideration

The Company has evaluated its financial statements and disclosures for the impact of subsequent events up to the date of filing its quarterly report on Form 10-Q with the Securities and Exchange Commission.

2. ACUTE CARE REVENUE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Acute Care Revenue

The Company’s healthcare facilities have entered into agreements with third-party payors, including government programs and managed care health plans, under which the facilities are paid based upon established charges, the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from established charges. Additionally, the Company offers discounts through its uninsured discount program to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans, or charity care.

Net patient revenue is reported at the estimated net realizable amounts from third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and are adjusted, if necessary, in future periods when final settlements are determined. The Company also records a provision for bad debts related to uninsured accounts to record its self-pay accounts receivable at the estimated amounts expected to be collected.

The sources of the Company’s net patient revenue by payor are summarized as follows, and are reflected before of the provision for bad debts:

 

September 30, September 30,
       Quarter
Ended December  31,
 
       2011     2010  

Medicare

       23.8     23.8

Managed Medicare

       7.3     8.2

Medicaid and managed Medicaid

       15.5     13.8

Managed care and other

       39.6     40.0

Self-pay

       13.8     14.2
    

 

 

   

 

 

 

Total

       100.0     100.0
    

 

 

   

 

 

 

Allowance For Doubtful Accounts

The provision for bad debts and the allowance for doubtful accounts relate primarily to amounts due directly from patients. The Company’s estimation of the allowance for doubtful accounts is based primarily upon the type and age of the patient accounts receivable and the effectiveness of collection efforts. The Company’s policy is to reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts related to co-payments and deductibles, as these charges are recorded. The Company monitors accounts receivable balances and the effectiveness of reserve policies on a monthly basis and review various analytics to support the basis for estimates. These efforts primarily consist of reviewing the following:

 

   

Historical write-off and collection experience using a hindsight or look-back approach;

 

   

Revenue and volume trends by payor, particularly the self-pay components;

 

   

Changes in the aging and payor mix of accounts receivable, including increased focus on accounts due from the uninsured and accounts that represent co-payments and deductibles due from patients;

 

   

Cash collections as a percentage of net patient revenue less bad debt expense;

 

   

Trending of days revenue in accounts receivable; and

 

   

Various allowance coverage statistics.

 

6


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The Company regularly performs hindsight procedures to evaluate historical write-off and collection experience throughout the year to assist in determining the reasonableness of the process for estimating the allowance for doubtful accounts. The Company does not pursue collection of amounts related to patients who qualify for charity care under the Company’s guidelines. Charity care accounts are deducted from gross revenue and do not affect the provision for bad debts.

At December 31, 2011 and September 30, 2011, the Company’s self-pay receivables, including amounts due from uninsured patients and co-payment and deductible amounts due from insured patients, were $262.7 million and $241.1 million, respectively. At December 31, 2011 and September 30, 2011, the Company’s allowance for doubtful accounts was $214.0 million and $185.5 million, respectively. The increase in the allowance for doubtful accounts is due primarily to an increase in self-pay revenue. For the quarter ended December 31, 2011, self-pay admissions as a percentage of total admissions were 7.2%, compared to 6.0% in the prior year quarter.

3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt and capital lease obligations consist of the following (in thousands):

 

September 30, September 30,
       December 31,
2011
       September 30,
2011
 

Senior secured term loan facility

     $ 1,012,676         $ 1,015,055   

8.375% senior notes due 2019

       844,367           844,175   

Capital leases and other obligations

       18,357           19,539   
    

 

 

      

 

 

 
       1,875,400           1,878,769   

Less current maturities

       13,855           14,020   
    

 

 

      

 

 

 
     $ 1,861,545         $ 1,864,749   
    

 

 

      

 

 

 

As of December 31, 2011, the senior secured term loan facility balance reflects an original issue discount (“OID”) of $4.6 million, which is net of accumulated amortization of $488,000. The 8.375% senior notes due 2019 (the “Senior Notes”) balance reflects an OID of $5.6 million, which is net of accumulated amortization of $512,000.

$1.325 Billion Senior Secured Credit Facilities

The Company is party to a senior credit agreement (the “Restated Credit Agreement”). The Restated Credit Agreement provides for senior secured financing of up to $1.325 billion consisting of (1) a $1.025 billion senior secured term loan facility with a seven-year maturity and (2) a $300.0 million senior secured revolving credit facility with a five-year maturity, of which up to $150.0 million may be utilized for the issuance of letters of credit (together, the “Senior Secured Credit Facilities”). Principal under the senior secured term loan facility is due in consecutive equal quarterly installments in an aggregate annual amount equal to 1% of the original principal amount of $1.025 billion, with the remaining balance due upon maturity of the senior secured term loan facility. The senior secured revolving credit facility does not require installment payments.

Borrowings under the senior secured term loan facility bear interest at a rate per annum equal to, at the Company’s option, either (1) a base rate (the “base rate”) determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A. and (c) a one-month LIBOR rate, subject to a floor of 1.25%, plus 1.00%, in each case, plus a margin of 2.75% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, subject to a floor of 1.25%, plus a margin of 3.75% per annum. Borrowings under the senior secured revolving credit facility generally bear interest at a rate per annum equal to, at the Company’s option, either (1) the base rate plus a margin of 2.50% per annum, or (2) the LIBOR rate for the interest period relevant to such borrowing plus a margin of 3.50% per annum. In addition to paying interest on outstanding principal under the Senior Secured Credit Facilities, the Company is required to pay a commitment fee on the unutilized commitments under the senior secured revolving credit facility, as well as pay customary letter of credit fees and agency fees.

The Senior Secured Credit Facilities are unconditionally guaranteed by IAS and certain subsidiaries of the Company (collectively, the “Credit Facility Guarantors”) and are required to be guaranteed by all future material wholly-owned subsidiaries of the Company, subject to certain exceptions. All obligations under the Restated Credit Agreement are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the Credit Facility Guarantors, including (1) a pledge of 100% of the equity interests of the Company and the Credit Facility Guarantors, (2) mortgage liens on all of the Company’s material real property and that of the Credit Facility Guarantors, and (3) all proceeds of the foregoing.

The Restated Credit Agreement requires the Company to mandatorily prepay borrowings under the senior secured term loan facility with net cash proceeds of certain asset dispositions, following certain casualty events, following certain borrowings or debt issuances, and from a percentage of annual excess cash flow.

 

7


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The Restated Credit Agreement contains certain restrictive covenants, including, among other things: (1) limitations on the incurrence of debt and liens; (2) limitations on investments other than, among other exceptions, certain acquisitions that meet certain conditions; (3) limitations on the sale of assets outside of the ordinary course of business; (4) limitations on dividends and distributions; and (5) limitations on transactions with affiliates, in each case, subject to certain exceptions. The Restated Credit Agreement also contains certain customary events of default, including, without limitation, a failure to make payments under the Senior Secured Credit Facilities, cross-defaults, certain bankruptcy events and certain change of control events.

8.375% Senior Notes due 2019

The Company, together with its wholly owned subsidiary IASIS Capital Corporation (“IASIS Capital”) (together, the “Issuers”), have issued $850.0 million aggregate principal amount of Senior Notes, which mature on May 15, 2019, pursuant to an indenture, dated as of May 3, 2011, among the Issuers and certain of the Issuers’ wholly owned domestic subsidiaries that guarantee the Senior Secured Credit Facilities (the “Notes Guarantors”) (the “Indenture”). The Indenture provides that the Senior Notes are general unsecured, senior obligations of the Issuers, and initially will be unconditionally guaranteed on a senior unsecured basis.

The Senior Notes bear interest at a rate of 8.375% per annum, payable semi-annually, in cash in arrears, on May 15 and November 15 of each year.

The Company may redeem the Senior Notes, in whole or in part, at any time prior to May 15, 2014, at a price equal to 100% of the aggregate principal amount of the Senior Notes plus a “make-whole” premium and accrued and unpaid interest and special interest, if any, to but excluding the redemption date. In addition, the Company may redeem up to 35% of the Senior Notes before May 15, 2014, with the net cash proceeds from certain equity offerings at a redemption price equal to 108.375% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date, subject to compliance with certain conditions.

The Indenture contains covenants that limit the Company’s (and its restricted subsidiaries’) ability to, among other things: (1) incur additional indebtedness or liens or issue disqualified stock or preferred stock; (2) pay dividends or make other distributions on, redeem or repurchase the Company’s capital stock; (3) sell certain assets; (4) make certain loans and investments; (5) enter into certain transactions with affiliates; (5) impose restrictions on the ability of a subsidiary to pay dividends or make payments or distributions to the Company and its restricted subsidiaries; and (6) consolidate, merge or sell all or substantially all of the Company’s assets. These covenants are subject to a number of important limitations and exceptions.

The Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately. If the Company experiences certain kinds of changes of control, it must offer to purchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest and special interest, if any, to but excluding the repurchase date. Under certain circumstances, the Company will have the ability to make certain payments to facilitate a change of control transaction and to provide for the assumption of the Senior Notes by a new parent company resulting from such change of control transaction. If such change of control transaction is facilitated, the Issuers will be released from all obligations under the Indenture and the Issuers and the trustee will execute a supplemental indenture effectuating such assumption and release.

4. INTEREST RATE SWAPS

In March 2009, the Company executed interest rate swap agreements with Citibank, N.A. (“Citibank”) and Wachovia Bank, N.A. (currently Wells Fargo Bank, N.A.), as counterparties, with notional amounts totaling $425.0 million, of which $225.0 million expired on February 28, 2011. As of December 31, 2011, two interest rate swap agreements remain in effect with each agreement having a notional amount of $100.0 million expiring on February 29, 2012. Under the remaining agreements, the Company is required to make monthly fixed rate payments to the counterparties, as calculated on the notional amounts, at an annual fixed rate of 2.0%. The counterparties are obligated to make monthly floating rate payments to the Company based on the one-month LIBOR rate. The Company completes periodic assessments of the effectiveness of its cash flow hedges and determined that these cash flow hedges are ineffective subsequent to March 31, 2011, as a result of the Company’s refinancing transaction in May 2011, which established a LIBOR floor applicable to borrowings under the Senior Secured Credit Facilities, the source of the Company’s variable rate debt. Accordingly, an $845,000 gain resulting from the change in fair value of these hedging instruments has been reflected as a component

 

8


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

of interest expense in the accompanying unaudited condensed consolidated statement of operations for the quarter ended December 31, 2011. No gain or loss has been reflected in the accompanying unaudited condensed consolidated statement of operations for the quarter ended December 31, 2010, as these cash flow hedges were determined to be highly effective.

In August 2011, the Company executed forward starting interest rate swaps with Citibank and Barclays Bank PLC, as counterparties, with notional amounts totaling $350.0 million, each agreement effective March 31, 2013 and expiring between September 30, 2014 and September 30, 2016. Under these agreements, the Company will be required to make quarterly fixed rate payments at annual rates ranging from 1.6% to 2.2%. The counterparties will be obligated to make quarterly floating rate payments to the Company based on the three-month LIBOR rate, each subject to a floor of 1.25%. Additionally, in August 2011, the Company executed a forward starting interest rate cap with Citibank, as counterparty, with a notional amount of $350.0 million and a cap rate of 1.75%, effective March 1, 2012 and expiring March 31, 2013. The Company completed an assessment of these cash flow hedges during the quarter ended December 31, 2011, and determined that these hedges were highly effective. Accordingly, no gain or loss has been reflected in the accompanying unaudited condensed consolidated statement of operations related to these hedges, and the change in fair value has been included in accumulated other comprehensive loss as a component of member’s equity.

 

September 30,

Effective Dates

     Total  Notional
Amounts
 
       (in thousands)  

Interest Rate Swaps

    

Expiring on February 29, 2012

     $ 200,000   

Effective from March 31, 2013 to September 30, 2014

       50,000   

Effective from March 31, 2013 to September 30, 2015

       100,000   

Effective from March 31, 2013 to September 30, 2016

       200,000   

Interest Rate Cap

    

Effective from March 1, 2012 to March 31, 2013

     $ 350,000   

The fair value of the Company’s interest rate hedges at December 31, 2011 and September 30, 2011, reflect liability balances of $3.6 million and $3.1 million, respectively, and are included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets. The fair value of the Company’s interest rate hedges reflects a liability because the effect of the forward LIBOR curve on future interest payments results in less interest due to the Company under the variable rate component included in the interest rate hedging agreements, as compared to the amount due the Company’s counterparties under the fixed interest rate component.

5. ACQUISITIONS

Fiscal 2011

Effective May 1, 2011, the Company acquired a 79.1% equity ownership interest in St. Joseph Medical Center (“St. Joseph”), a 792-licensed bed acute care hospital facility located in downtown Houston, Texas, in exchange for cash consideration of $156.8 million, subject to changes in net assets. In accordance with the purchase agreement, independent investors, most of whom are physicians on the medical staff of St. Joseph, retained an aggregate 20.9% ownership interest in the hospital. This acquisition was accounted for as a business combination; therefore the Company allocated the purchase price to assets acquired or liabilities assumed based on their fair values. The excess of the purchase price allocation over those fair values was recorded as goodwill. The Company’s third party valuation of acquired assets has been finalized, and the appropriate fair values have been reflected in the accompanying unaudited condensed consolidated balance sheet at December 31, 2011.

Effective October 1, 2010, the Company acquired Brim Holdings, Inc. (“Brim”) in a cash-for-stock transaction valued at $95.0 million, subject to changes in net working capital. Brim operates Wadley Regional Medical Center (“Wadley”), a 370-licensed bed acute care hospital facility located in Texarkana, Texas, and Pikes Peak Regional Hospital (“Pikes Peak”), a 15-licensed bed critical access acute care hospital facility, in Woodland Park, Colorado, through operating lease agreements with separate parties. The Brim acquisition was accounted for as a business combination; therefore, the Company allocated the purchase price of these facilities to the assets acquired or liabilities assumed based on their fair values. The excess of the purchase price allocation over those fair values was recorded as goodwill.

 

9


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

6. GOODWILL

The following table presents the changes in the carrying amount of goodwill (in thousands):

 

September 30, September 30, September 30,
       Acute
Care
     Health
Choice
       Total  

Balance at September 30, 2011

     $ 802,894       $ 5,757         $ 808,651   

Adjustments related to acquisitions

       (1,642      —             (1,642
    

 

 

    

 

 

      

 

 

 

Balance at December 31, 2011

     $ 801,252       $ 5,757         $ 807,009   
    

 

 

    

 

 

      

 

 

 

7. COMPREHENSIVE INCOME

Comprehensive income consists of two components: net earnings and other comprehensive income. Other comprehensive income refers to revenues, expenses, gains and losses that under authoritative accounting guidance related to comprehensive income are recorded as elements of equity, but are excluded from net earnings. The following table presents the components of comprehensive income, net of income taxes (in thousands):

 

September 30, September 30,
      

Quarter Ended

December 31,

 
       2011      2010  

Net earnings

     $ 3,585       $ 14,066   

Change in fair value of highly effective interest rate hedges

       (1,344      1,560   

Amortization of other comprehensive loss related to ineffective interest rate hedges

       1,234         —     

Change in income tax expense

       (40      (577
    

 

 

    

 

 

 

Comprehensive income

     $ 3,435       $ 15,049   
    

 

 

    

 

 

 

The components of accumulated other comprehensive loss, net of income taxes, are as follows (in thousands):

 

September 30, September 30,
       December 31,
2011
     September 30,
2011
 

Fair value of interest rate hedges

     $ (4,052    $ (3,942

Income tax benefit

       1,515         1,475   
    

 

 

    

 

 

 

Accumulated other comprehensive loss

     $ (2,537    $ (2,467
    

 

 

    

 

 

 

8. COMMITMENTS AND CONTINGENCIES

Net Revenue

The calculation of appropriate payments from the Medicare and Medicaid programs, as well as terms governing agreements with other third-party payors, is complex and subject to interpretation. Final determination of amounts earned under the Medicare and Medicaid programs often occurs subsequent to the year in which services are rendered because of audits by the programs, rights of appeal and the application of numerous technical provisions. In the opinion of management, adequate provision has been made for adjustments that may result from such routine audits and appeals.

 

10


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Professional, General and Workers’ Compensation Liability Risks

The Company is subject to claims and legal actions in the ordinary course of business, including but not limited to claims relating to patient treatment and personal injuries. To cover these types of claims, the Company maintains professional and general liability insurance in excess of self-insured retentions through a commercial insurance carrier in amounts that the Company believes to be sufficient for its operations, although, potentially, some claims may exceed the scope of coverage in effect. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is currently not a party to any such proceedings that, in the Company’s opinion, would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company expenses an estimate of the costs it expects to incur under the self-insured retention exposure for professional and general liability claims using historical claims data, demographic factors, severity factors, current incident logs and other actuarial analysis. At December 31, 2011 and September 30, 2011, the Company’s professional and general liability accrual for asserted and unasserted claims totaled $70.9 million and $60.1 million, respectively.

The Company is subject to claims and legal actions in the ordinary course of business relative to workers’ compensation matters. To cover these types of claims, the Company maintains workers’ compensation insurance coverage with a self-insured retention. The Company accrues the costs of workers’ compensation claims based upon estimates derived from its claims experience.

Health Choice

Health Choice has entered into capitated contracts whereby the Plan provides managed healthcare services in exchange for fixed periodic and supplemental payments from the Arizona Health Care Cost Containment System (“AHCCCS”) and the Centers for Medicare & Medicaid Services (“CMS”). These services are provided regardless of the actual costs incurred to provide these services. The Company receives reinsurance and other supplemental payments from AHCCCS to cover certain costs of healthcare services that exceed certain thresholds. The Company believes that current capitated payments received, together with reinsurance and other supplemental payments, are sufficient to pay for the services Health Choice is obligated to deliver. As of December 31, 2011, the Company has provided a performance guaranty in the form of letters of credit totaling $48.3 million for the benefit of AHCCCS to support Health Choice’s obligations under its contract to provide and pay for the healthcare services. The amount of the performance guaranty is generally based, in part, upon the membership in the Plan and the related capitation revenue paid to Health Choice.

Acquisitions

The Company has acquired and in the future may choose to acquire businesses with prior operating histories. Such businesses may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company has procedures designed to conform business practices to its policies following the completion of any acquisition, there can be no assurance that the Company will not become liable for previous activities of prior owners that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines.

Other

In November 2010, the Department of Justice (“DOJ”) sent a letter to IAS, the parent company of IASIS, requesting a 12-month tolling agreement in connection with an investigation into Medicare claims submitted by our hospitals in connection with the implantation of implantable cardioverter defibrillators (“ICDs”) during the period 2003 to the present. At that time, neither the precise number of procedures, number of claims, nor the hospitals involved were identified by the DOJ. The Company understands that the government is conducting a national initiative with respect to ICD procedures involving a number of healthcare providers and is seeking information in order to determine if ICD implantation procedures were performed in accordance with Medicare coverage requirements. On January 11, 2011, IAS entered into the tolling agreement with the DOJ and, subsequently, the DOJ has provided IAS with a list of 194 procedures involving ICDs at 14 hospitals which are the subject of further medical necessity review by the DOJ. IAS is cooperating fully with the government and, to date, the DOJ has not asserted any claim against the Company’s hospitals. In October 2011, the government proposed, and IAS agreed, to extend the tolling agreement for one year.

 

11


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

9. RECENT ACCOUNTING PRONOUNCEMENTS

Newly Adopted

In July 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-7, “Health Care Entities “ (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. ASU 2011-7 requires healthcare organizations to present their provision for doubtful accounts related to patient service revenue as a deduction from revenue, similar to contractual discounts. In addition, all healthcare organizations will be required to provide certain disclosures designed to help users understand how contractual discounts and bad debts affect recorded revenue in both interim and annual financial statements. ASU 2011-7 is required to be applied retrospectively and is effective for public companies for fiscal years, and interim periods within those years, beginning December 15, 2011, with early adoption permitted. The Company has early adopted this guidance effective October 1, 2011, and the change in presentation and additional disclosures are included in the Company’s unaudited condensed consolidated statements of operations and in Note 2.

In December 2010, the FASB issued ASU No. 2010-28, “Intangibles—Goodwill and Other” (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. ASU 2010-28 requires Step 2 of the impairment test be performed in circumstances where the carrying amount of a reporting unit is zero or negative and there are qualitative factors that indicate it is more likely than not that a goodwill impairment exists. ASU 2010-28 is effective for the Company’s fiscal year beginning October 1, 2011, and is not expected to significantly impact the Company’s financial position, results of operations or cash flows.

In August 2010, the FASB issued ASU No. 2010-24, “Health Care Entities” (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries. This ASU eliminates the practice of netting claim liabilities with expected related insurance recoveries for balance sheet presentation. Claim liabilities are to be determined with no regard for recoveries and presented gross. Expected recoveries are presented separately. The Company has adopted this guidance effective October 1, 2011, and the change in presentation has been reflected in the Company’s unaudited condensed consolidated balance sheet as of December 31, 2011.

In August 2010, the FASB issued ASU No. 2010-23, “Health Care Entities” (Topic 954): Measuring Charity Care for Disclosure. Due to the lack of comparability existing as a result of the use of either revenue or cost as the basis for disclosure of charity care, this ASU standardizes cost as the basis for charity care disclosures and specifies the elements of cost to be used in charity care disclosures. ASU 2010-23 is effective for the Company’s fiscal year beginning October 1, 2011, and is not expected to significantly impact the Company’s financial statement disclosures.

Recently Issued

In August 2011, the FASB issued ASU No. 2011-08, “Intangibles—Goodwill and Other” (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption is permitted. ASU 2011-08 is not expected to significantly impact the Company’s financial position, results of operations or cash flows.

 

12


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

10. SEGMENT AND GEOGRAPHIC INFORMATION

The Company’s acute care hospitals and related healthcare businesses are similar in their activities and the economic environments in which they operate (i.e. urban and suburban markets). Accordingly, the Company’s reportable operating segments consist of (1) acute care hospitals and related healthcare businesses, collectively “Acute Care”, and (2) Health Choice. The following is a financial summary by business segment for the periods indicated (in thousands):

 

September 30, September 30, September 30, September 30,
       For the Quarter Ended December 31, 2011  
       Acute Care      Health Choice        Eliminations      Consolidated  

Acute care revenue

     $ 543,214       $ —           $ —         $ 543,214   

Less: Provision for bad debts

       (70,279      —             —           (70,279
    

 

 

    

 

 

      

 

 

    

 

 

 

Acute care revenue, net

       472,935         —             —           472,935   

Premium revenue

       —           150,738           —           150,738   

Revenue between segments

       1,629         —             (1,629      —     
    

 

 

    

 

 

      

 

 

    

 

 

 

Net revenue

       474,564         150,738           (1,629      623,673   

Salaries and benefits (excludes stock-based compensation)

       218,337         5,127           —           223,464   

Supplies

       84,119         51           —           84,170   

Medical claims

       —           125,874           (1,629      124,245   

Rentals and leases

       11,886         380           —           12,266   

Other operating expenses

       108,297         5,686           —           113,983   

Medicaid EHR incentive payments

       (6,677      —             —           (6,677
    

 

 

    

 

 

      

 

 

    

 

 

 

Adjusted EBITDA(1)

       58,602         13,620           —           72,222   

Interest expense, net

       34,940         —             —           34,940   

Depreciation and amortization

       27,656         878           —           28,534   

Stock-based compensation

       500         —             —           500   

Management fees

       1,250         —             —           1,250   
    

 

 

    

 

 

      

 

 

    

 

 

 

Earnings (loss) from continuing operations before gain on disposal of assets and income taxes

       (5,744      12,742           —           6,998   

Gain on disposal of assets, net

       240         —             —           240   
    

 

 

    

 

 

      

 

 

    

 

 

 

Earnings (loss) from continuing operations before income taxes

     $ (5,504    $ 12,742         $ —         $ 7,238   
    

 

 

    

 

 

      

 

 

    

 

 

 

Segment assets

     $ 2,331,018       $ 318,022            $ 2,649,040   
    

 

 

    

 

 

         

 

 

 

Capital expenditures

     $ 23,781       $ 576            $ 24,357   
    

 

 

    

 

 

         

 

 

 

Goodwill

     $ 801,252       $ 5,757            $ 807,009   
    

 

 

    

 

 

         

 

 

 

 

13


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

September 30, September 30, September 30, September 30,
       For the Quarter Ended December 31, 2010  
       Acute Care      Health Choice        Eliminations      Consolidated  

Acute care revenue

     $ 471,688       $ —           $ —         $ 471,688   

Less: Provision for bad debts

       (59,614      —             —           (59,614
    

 

 

    

 

 

      

 

 

    

 

 

 

Acute care revenue, net

       412,074         —             —           412,074   

Premium revenue

       —           202,192           —           202,192   

Revenue between segments

       2,660         —             (2,660      —     
    

 

 

    

 

 

      

 

 

    

 

 

 

Net revenue

       414,734         202,192           (2,660      614,266   

Salaries and benefits (excludes stock-based compensation)

       184,394         5,023           —           189,417   

Supplies

       76,392         44           —           76,436   

Medical claims

       —           173,994           (2,660      171,334   

Rentals and leases

       10,722         444           —           11,166   

Other operating expenses

       90,830         6,296           —           97,126   
    

 

 

    

 

 

      

 

 

    

 

 

 

Adjusted EBITDA(1)

       52,396         16,391           —           68,787   

Interest expense, net

       16,877         —             —           16,877   

Depreciation and amortization

       23,151         895           —           24,046   

Stock-based compensation

       496         —             —           496   

Management fees

       1,250         —             —           1,250   
    

 

 

    

 

 

      

 

 

    

 

 

 

Earnings from continuing operations before gain on disposal of assets and income taxes

       10,622         15,496           —           26,118   

Gain on disposal of assets, net

       345         —             —           345   
    

 

 

    

 

 

      

 

 

    

 

 

 

Earnings from continuing operations before income taxes

     $ 10,967       $ 15,496         $ —         $ 26,463   
    

 

 

    

 

 

      

 

 

    

 

 

 

Segment assets

     $ 2,059,986       $ 326,396            $ 2,386,382   
    

 

 

    

 

 

         

 

 

 

Capital expenditures

     $ 15,360       $ —              $ 15,360   
    

 

 

    

 

 

         

 

 

 

Goodwill

     $ 792,637       $ 5,757            $ 798,394   
    

 

 

    

 

 

         

 

 

 

 

(1) Adjusted EBITDA represents net earnings from continuing operations before interest expense, income tax expense, depreciation and amortization, stock-based compensation, gain (loss) on disposal of assets and management fees. Management fees represent monitoring and advisory fees paid to TPG, the Company’s majority financial sponsor, and certain other members of IASIS Investment LLC, majority shareholder of IAS. Management routinely calculates and communicates adjusted EBITDA and believes that it is useful to investors because it is commonly used as an analytical indicator within the healthcare industry to evaluate hospital performance, allocate resources and measure leverage capacity and debt service ability. In addition, the Company uses adjusted EBITDA as a measure of performance for its business segments and for incentive compensation purposes. Adjusted EBITDA should not be considered as a measure of financial performance under GAAP, and the items excluded from adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to net earnings, cash flows generated by operating, investing, or financing activities or other financial statement data presented in the condensed consolidated financial statements as an indicator of financial performance or liquidity. Adjusted EBITDA, as presented, differs from what is defined under the Company’s senior secured credit facilities and may not be comparable to similarly titled measures of other companies.

 

14


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Senior Notes described in Note 3 are fully and unconditionally guaranteed on a joint and several basis by all of the Company’s existing domestic subsidiaries, other than non-guarantor subsidiaries, which include Health Choice and the Company’s non-wholly owned subsidiaries. The guarantees are subject to customary release provisions set forth in the Indenture for the Senior Notes.

Summarized unaudited condensed consolidating balance sheets at December 31, 2011 and September 30, 2011, unaudited condensed consolidating statements of operations and cash flows for the quarters ended December 31, 2011 and 2010, for the Company, segregating the parent company issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, are found below. Prior year amounts have been reclassified to conform to the current year presentation.

 

15


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Balance Sheet (unaudited)

December 31, 2011

(in thousands)

 

September 30, September 30, September 30, September 30, September 30,
       Parent Issuer        Subsidiary
Guarantors
     Subsidiary
Non-Guarantors
       Eliminations      Condensed
Consolidated
 

Assets

                    

Current assets

                    

Cash and cash equivalents

     $ —           $ 73,718       $ 10,278         $ —         $ 83,996   

Accounts receivable, net

       —             112,360         191,237           —           303,597   

Inventories

       —             25,553         43,632           —           69,185   

Deferred income taxes

       39,153           —           —             —           39,153   

Prepaid expenses and other current assets

       —             38,202         35,901           —           74,103   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Total current assets

       39,153           249,833         281,048           —           570,034   

Property and equipment, net

       —             363,568         800,919           —           1,164,487   

Intercompany

       —             (238,199      238,199           —           —     

Net investment in and advances to subsidiaries

       2,029,575           —           —             (2,029,575      —     

Goodwill

       7,283           68,156         731,570           —           807,009   

Other intangible assets, net

       —             8,204         23,250           —           31,454   

Other assets, net

       36,583           21,884         17,589           —           76,056   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Total assets

     $ 2,112,594         $ 473,446       $ 2,092,575         $ (2,029,575    $ 2,649,040   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Liabilities and Equity

                    

Current liabilities

                    

Accounts payable

     $ —           $ 34,270       $ 69,467         $ —         $ 103,737   

Salaries and benefits payable

       —             21,529         25,547           —           47,076   

Accrued interest payable

       9,522           (3,221      3,221           —           9,522   

Medical claims payable

       —             —           75,357           —           75,357   

Other accrued expenses and other current liabilities

       —             28,037         58,749           —           86,786   

Current portion of long-term debt and capital lease obligations

       10,250           3,605         24,942           (24,942      13,855   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Total current liabilities

       19,772           84,220         257,283           (24,942      336,333   

Long-term debt and capital lease obligations

       1,846,792           14,753         660,463           (660,463      1,861,545   

Deferred income taxes

       131,465           —           —             —           131,465   

Other long-term liabilities

       —             97,106         620           —           97,726   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Total liabilities

       1,998,029           196,079         918,366           (685,405      2,427,069   

Non-controlling interests with redemption rights

       —             97,594         —             —           97,594   

Equity

                    

Member’s equity

       114,565           169,961         1,174,209           (1,344,170      114,565   

Non-controlling interests

       —             9,812         —             —           9,812   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Total equity

       114,565           179,773         1,174,209           (1,344,170      124,377   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Total liabilities and equity

     $ 2,112,594         $ 473,446       $ 2,092,575         $ (2,029,575    $ 2,649,040   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

 

16


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Balance Sheet (unaudited)

September 30, 2011

(in thousands)

 

September 30, September 30, September 30, September 30, September 30,
       Parent
Issuer
       Subsidiary
Guarantors
     Subsidiary
Non-Guarantors
       Eliminations      Condensed
Consolidated
 

Assets

                    

Current assets:

                    

Cash and cash equivalents

     $ —           $ 140,062       $ 7,265         $ —         $ 147,327   

Accounts receivable, net

       —             103,176         174,756           —           277,932   

Inventories

       —             25,001         43,329           —           68,330   

Deferred income taxes

       40,415           —           —             —           40,415   

Prepaid expenses and other current assets

       —             32,032         40,882           —           72,914   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Total current assets

       40,415           300,271         266,232           —           606,918   

Property and equipment, net

       —             359,503         808,417           —           1,167,920   

Intercompany

       —             (291,241      291,241           —           —     

Net investment in and advances to subsidiaries

       2,054,007           —           —             (2,054,007      —     

Goodwill

       6,760           70,321         731,570           —           808,651   

Other intangible assets, net

       —             8,779         24,000           —           32,779   

Other assets, net

       37,111           6,086         20,312           —           63,509   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Total assets

     $ 2,138,293         $ 453,719       $ 2,141,772         $ (2,054,007    $ 2,679,777   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Liabilities and Equity

                    

Current liabilities:

                    

Accounts payable

     $ —           $ 25,087       $ 67,718         $ —         $ 92,805   

Salaries and benefits payable

       —             29,790         28,589           —           58,379   

Accrued interest payable

       30,045           (3,234      3,234           —           30,045   

Medical claims payable

       —             —           85,723           —           85,723   

Other accrued expenses and other current liabilities

       —             29,114         71,716           —           100,830   

Current portion of long-term debt and capital lease obligations

       10,250           3,770         25,107           (25,107      14,020   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Total current liabilities

       40,295           84,527         282,087           (25,107      381,802   

Long-term debt and capital lease obligations

       1,848,980           15,769         667,969           (667,969      1,864,749   

Deferred income taxes

       131,018           —           —             —           131,018   

Other long-term liabilities

       —             77,818         623           —           78,441   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Total liabilities

       2,020,293           178,114         950,679           (693,076      2,456,010   

Non-controlling interests with redemption rights

       —             95,977         —             —           95,977   

Equity:

                    

Member’s equity

       118,000           169,838         1,191,093           (1,360,931      118,000   

Non-controlling interests

       —             9,790         —             —           9,790   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Total equity

       118,000           179,628         1,191,093           (1,360,931      127,790   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Total liabilities and equity

     $ 2,138,293         $ 453,719       $ 2,141,772         $ (2,054,007    $ 2,679,777   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

 

17


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Quarter Ended December 31, 2011 (unaudited)

(in thousands)

 

September 30, September 30, September 30, September 30, September 30,
       Parent Issuer      Subsidiary
Guarantors
     Subsidiary
Non-Guarantors
     Eliminations      Condensed
Consolidated
 

Net revenue

                

Acute care revenue

     $ —         $ 191,865       $ 352,978       $ (1,629    $ 543,214   

Less: Provision for bad debts

       —           (29,843      (40,436      —           (70,279
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acute care revenue, net

       —           162,022         312,542         (1,629      472,935   

Premium revenue

       —           —           150,738         —           150,738   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net revenue

       —           162,022         463,280         (1,629      623,673   

Costs and expenses

                

Salaries and benefits

       —           97,548         126,416         —           223,964   

Supplies

       —           30,407         53,763         —           84,170   

Medical claims

       —           —           125,874         (1,629      124,245   

Rentals and leases

       —           4,959         7,307         —           12,266   

Other operating expenses

       —           33,019         80,964         —           113,983   

Medicaid EHR incentive payments

       —           (1,718      (4,959      —           (6,677

Interest expense, net

       34,940         —           11,978         (11,978      34,940   

Depreciation and amortization

       —           10,975         17,559         —           28,534   

Management fees

       1,250         (7,619      7,619         —           1,250   

Equity in earnings of affiliates

       (29,142      —           —           29,142         —     
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total costs and expenses

       7,048         167,571         426,521         15,535         616,675   

Earnings (loss) from continuing operations before gain on disposal of assets and income taxes

       (7,048      (5,549      36,759         (17,164      6,998   

Gain on disposal of assets, net

       —           237         3         —           240   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) from continuing operations before income taxes

       (7,048      (5,312      36,762         (17,164      7,238   

Income tax expense

       3,605         —           —           —           3,605   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings (loss) from continuing operations

       (10,653      (5,312      36,762         (17,164      3,633   

Gain (loss) from discontinued operations, net of income taxes

       28         (19      (57      —           (48
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings (loss)

       (10,625      (5,331      36,705         (17,164      3,585   

Net earnings attributable to non-controlling interests

       —           (2,232      —           —           (2,232
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings (loss) attributable to IASIS Healthcare LLC

     $ (10,625    $ (7,563    $ 36,705       $ (17,164    $ 1,353   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Quarter Ended December 31, 2010 (unaudited)

(in thousands)

 

September 30, September 30, September 30, September 30, September 30,
       Parent Issuer      Subsidiary
Guarantors
     Subsidiary
Non-Guarantors
     Eliminations      Condensed
Consolidated
 

Net revenue

                

Acute care revenue

     $ —         $ 184,835       $ 289,513       $ (2,660    $ 471,688   

Less: Provisions for bad debts

       —           (25,493      (34,121      —           (59,614
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Acute care revenue, net

          159,342         255,392         (2,660      412,074   

Premium revenue

       —           —           202,192         —           202,192   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net revenue

       —           159,342         457,584         (2,660      614,266   

Costs and expenses

                

Salaries and benefits

       —           93,343         96,570         —           189,913   

Supplies

       —           30,767         45,669         —           76,436   

Medical claims

       —           —           173,994         (2,660      171,334   

Rentals and leases

       —           4,590         6,576         —           11,166   

Other operating expenses

       —           32,728         64,398         —           97,126   

Interest expense, net

       16,877         —           10,390         (10,390      16,877   

Depreciation and amortization

       —           9,996         14,050         —           24,046   

Management fees

       1,250         (6,181      6,181         —           1,250   

Equity in earnings of affiliates

       (26,789      —           —           26,789         —     
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total costs and expenses

       (8,662      165,243         417,828         13,739         588,148   

Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes

       8,662         (5,901      39,756         (16,399      26,118   

Gain (loss) on disposal of assets, net

       —           364         (19      —           345   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) from continuing operations before income taxes

       8,662         (5,537      39,737         (16,399      26,463   

Income tax expense

       9,189         —           —           —           9,189   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings (loss) from continuing operations

       (527      (5,537      39,737         (16,399      17,274   

Earnings (loss) from discontinued operations, net of income taxes

       1,883         (5,031      (60      —           (3,208
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings (loss)

       1,356         (10,568      39,677         (16,399      14,066   

Net earnings attributable to non-controlling interests

       —           (2,320      —           —           (2,320
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings (loss) attributable to IASIS Healthcare LLC

     $ 1,356       $ (12,888    $ 39,677       $ (16,399    $ 11,746   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Cash Flows

For the Quarter Ended December 31, 2011 (unaudited)

(in thousands)

 

September 30, September 30, September 30, September 30, September 30,
       Parent Issuer      Subsidiary
Guarantors
     Subsidiary
Non-Guarantors
     Eliminations      Condensed
Consolidated
 

Cash flows from operating activities

                

Net earnings (loss)

     $ (10,625    $ (5,331    $ 36,705       $ (17,164    $ 3,585   

Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:

                

Depreciation and amortization

       —           10,975         17,559         —           28,534   

Amortization of loan costs

       1,902         —           —           —           1,902   

Stock-based compensation

       500         —           —           —           500   

Deferred income taxes

       3,067         —           —           —           3,067   

Income tax benefit from stock-based compensation

       6         —           —           —           6   

Fair value change in interest rate hedges

       (845      —           —           —           (845

Amortization of other comprehensive loss

       1,234         —           —           —           1,234   

Gain on disposal of assets, net

       —           (237      (3      —           (240

Loss from discontinued operations, net

       (28      19         57         —           48   

Equity in earnings of affiliates

       (29,142      —           —           29,142         —     

Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:

                

Accounts receivable, net

       —           (10,378      (16,482      —           (26,860

Inventories, prepaid expenses and other current assets

       —           (20,759      17,920         —           (2,839

Accounts payable, other accrued expenses and other accrued liabilities

       (20,523      10,123         (30,366      —           (40,766
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) operating activities — continuing operations

       (54,454      (15,588      25,390         11,978         (32,674

Net cash provided by (used in) operating activities — discontinued operations

       (28      1         —           —           (27
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) operating activities

       (54,482      (15,587      25,390         11,978         (32,701
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash flows from investing activities

                

Purchases of property and equipment, net

       —           (15,038      (9,319      —           (24,357

Cash paid for acquisitions, net

       —           602           —           —           602   

Change in other assets, net

       —           17,336         (16,165      —           1,171   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) investing activities

       —           2,900         (25,484      —           (22,584
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash flows from financing activities

                

Payment of debt and capital lease obligations

       (2,563      —           (1,182      —           (3,745

Debt financing costs incurred

       (998      —           —           —           (998

Distributions to non-controlling interests

       —           (3,303      —           —           (3,303

Change in intercompany balances with affiliates, net

       58,043         (50,354      4,289         (11,978      —     
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) financing activities

       54,482         (53,657      3,107         (11,978      (8,046
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Change in cash and cash equivalents

       —           (66,344      3,013         —           (63,331

Cash and cash equivalents at beginning of period

       —           140,062         7,265         —           147,327   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

     $ —         $ 73,718       $ 10,278       $ —         $ 83,996   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Cash Flows

For the Quarter Ended December 31, 2010 (unaudited)

(in thousands)

 

September 30, September 30, September 30, September 30, September 30,
       Parent Issuer      Subsidiary
Guarantors
     Subsidiary
Non-Guarantors
     Eliminations      Condensed
Consolidated
 

Cash flows from operating activities

                

Net earnings (loss)

     $ 1,356       $ (10,568    $ 39,677       $ (16,399    $ 14,066   

Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:

                

Depreciation and amortization

       —           9,996         14,050         —           24,046   

Amortization of loan costs

       810         —           —           —           810   

Stock-based compensation

       496         —           —           —           496   

Deferred income taxes

       2,539         —           —           —           2,539   

Income tax benefit from parent company interest

       2,240         —           —           —           2,240   

Loss (gain) on disposal of assets, net

       —           (364      19         —           (345

Loss (earnings) from discontinued operations, net

       (1,883      5,031         60         —           3,208   

Equity in earnings of affiliates

       (26,789      —           —           26,789         —     

Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:

                

Accounts receivable, net

       —           (4,451      (3,883      —           (8,334

Inventories, prepaid expenses and other current assets

       —           (12,280      6,324         —           (5,956

Accounts payable, other accrued expenses and other accrued liabilities

       (10,428      (2,654      (12,966      —           (26,048
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) operating activities — continuing operations

       (31,659      (15,290      43,281         10,390         6,722   

Net cash provided by (used in) operating activities — discontinued operations

       (1,883      1,643         —           —           (240
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) operating activities

       (33,542      (13,647      43,281         10,390         6,482   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash flows from investing activities

                

Purchases of property and equipment, net

       —           (6,597      (8,763      —           (15,360

Cash paid for acquisitions, net

       —           (574      (1,306      —           (1,880

Change in other assets, net

       —           (3,826      4,341         —           515   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash used in investing activities

       —           (10,997      (5,728      —           (16,725
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash flows from financing activities

                

Payment of debt and capital lease obligations

       (1,474      —           (459      —           (1,933

Distributions to non-controlling interests

       —           (3,089      —           —           (3,089

Change in intercompany balances with affiliates, net

       35,016         7,145         (31,771      (10,390      —     
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) financing activities

       33,542         4,056         (32,230      (10,390      (5,022
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Change in cash and cash equivalents

       —           (20,588      5,323         —           (15,265

Cash and cash equivalents at beginning of period

       —           143,599         912         —           144,511   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

     $ —         $ 123,011       $ 6,235       $ —         $ 129,246   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements, the notes to our unaudited condensed consolidated financial statements and the other financial information appearing elsewhere in this report. Data for the quarters ended December 31, 2011 and 2010, has been derived from our unaudited condensed consolidated financial statements. References herein to “we,” “our” and “us” are to IASIS Healthcare LLC and its subsidiaries. References herein to “IAS” are to IASIS Healthcare Corporation, our parent company.

FORWARD LOOKING STATEMENTS

Some of the statements we make in this report are forward-looking within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations including, but not limited to, the discussions of our operating and growth strategy (including possible acquisitions and dispositions), financing needs, projections of revenue, income or loss, capital expenditures and future operations. Those risks and uncertainties include, among others, changes in governmental healthcare programs that could reduce our revenues; the uncertain impact of federal health reform; the possibility of Health Choice Arizona, Inc.’s (“Health Choice” or the “Plan”) contract with the Arizona Health Care Cost Containment System (“AHCCCS”) being discontinued and changes in the payment structure under that contract, as well as an inability to control costs at Health Choice; shifts in payor mix from commercial and managed care payors to Medicaid and managed Medicaid; our ability to retain and negotiate reasonable contracts with managed care plans; a growth in the level of uncompensated care at our hospitals; our ability to recruit and retain quality physicians and medical professionals; competition from other hospitals and healthcare providers impacting our patient volume; our failure to continually enhance our hospitals with the most recent technological advances in diagnostic and surgical equipment; the federal health reform law’s significant restrictions on hospitals that have physician owners; a failure of our information systems that would adversely affect our ability to properly manage our operations; failure to effectively and timely implement electronic health record systems; claims brought against our facilities for malpractice, product liability and other legal grounds; difficulties with the integration of acquisitions that may disrupt our ongoing operations; our dependence on key management personnel; potential responsibilities and costs under environmental laws; the possibility of a decline in the fair value of our reporting units that could result in a material non-cash charge to earnings; the risks and uncertainties related to our ability to generate sufficient cash to service our existing indebtedness; our substantial level of indebtedness; the possibility of an increase in interest rates, which would increase the cost of servicing our debt; and the risks associated with us being owned by equity sponsors who have the ability to control our financial decisions. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results in future periods to differ materially from those anticipated in the forward-looking statements. Those risks and uncertainties, among others discussed in this report, are detailed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, and in our subsequent filings with the Securities and Exchange Commission (the “SEC”).

Although we believe that the assumptions underlying the forward-looking statements contained in this report are reasonable, any of these assumptions could prove to be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included in this report, you should not regard the inclusion of such information as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

 

22


Table of Contents

EXECUTIVE OVERVIEW

We are a leading owner and operator of acute care hospitals primarily located in high-growth urban and suburban markets. We operate our hospitals with a strong community focus by offering and developing healthcare services targeted to the needs of the markets we serve, promoting strong relationships with physicians and working with local managed care plans. At December 31, 2011, we owned or leased 18 acute care hospital facilities and one behavioral health hospital facility, with a total of 4,365 licensed beds, located in seven regions:

 

   

Salt Lake City, Utah;

 

   

Phoenix, Arizona;

 

   

Tampa-St. Petersburg, Florida;

 

   

five cities in Texas, including Houston and San Antonio;

 

   

Las Vegas, Nevada;

 

   

West Monroe, Louisiana; and

 

   

Woodland Park, Colorado.

We also own and operate Health Choice, a Medicaid and Medicare managed health plan in Phoenix, Arizona, that serves over 186,000 members.

Significant Industry Trends

The following sections discuss recent trends that we believe are significant factors in our current and/or future operating results and cash flows. Certain of these trends apply to the entire acute care hospital industry, while others may apply to us more specifically. These trends could be short-term in nature or could require long-term attention and resources. While these trends may involve certain factors that are outside of our control, the extent to which these trends affect our hospitals and our ability to manage the impact of these trends play vital roles in our current and future success. In many cases, we are unable to predict what impact, if any, these trends will have on us.

The Impact of Health Reform

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”), will change how healthcare services are covered, delivered, and reimbursed through expanded coverage of previously uninsured individuals and reduced government healthcare spending. In addition, as enacted, the law reforms certain aspects of health insurance, expands existing efforts to tie Medicare and Medicaid payments to performance and quality, places restrictions on physician-owned hospitals, and contains provisions intended to strengthen fraud and abuse enforcement. Because of the many variables involved, including the law’s complexity, lack of implementing regulations, possible amendment, repeal, or delayed implementation and pending review before the U.S. Supreme Court, the impact of the Health Reform Law, including how individuals and businesses will respond to the new choices afforded them, is not yet fully known. We believe, however, that trends toward pay-for-performance reimbursement models focused on cost control and clinically integrated healthcare delivery, which are encouraged by the Health Reform Law, are taking hold among private health insurers and will continue to do so irrespective of the outcome of the review in the U.S. Supreme Court.

The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid incentive payments that began in calendar year 2011 for eligible hospitals and professionals that implement certified electronic health records (“EHR”) technology and adopt the related meaningful use requirements. We will recognize income related to the Medicare or Medicaid incentive payments as we are able to satisfy all appropriate contingencies, which includes completing attestations as to our eligible hospitals adopting, implementing or demonstrating meaningful use of certified EHR technology, and additionally for Medicare incentive payments, deferring income until the related Medicare fiscal year has passed and cost report information used to determine the final amount of reimbursement is known. Included in our unaudited condensed consolidated statement of operations for the quarter ended December 31, 2011, is $6.7 million of operating income related to Medicaid EHR incentive payments received during the quarter. We have incurred and will continue to incur both capital costs and operating expenses in order to implement our certified EHR technology and meet meaningful use requirements. These costs and expenses are projected to continue during all stages of our certified EHR technology and meaningful use implementation. As a result, the timing of the expense recognition will not correlate with the receipt of the incentive payments and the recognition of revenues.

 

23


Table of Contents

Payor Mix Shift

Like others in the hospital industry, we have experienced a shift in our patient volumes and revenue from commercial and managed care payors to self-pay and Medicaid, including managed Medicaid. This has resulted in pressures on pricing and operating margins created from providing the same level of patient care, but for less reimbursement. This shift is reflective of continued high unemployment and the resulting increases in both states’ Medicaid rolls and the uninsured population. Additionally, we have recently experienced growth in our self-pay revenue, resulting in large part, from an increase in the volume of uninsured patients, particularly in Arizona where the state has implemented measures to reduce Medicaid enrollment. We believe the decline in managed care volume and revenue mix is not only indicative of the depressed labor market, but also utilization behavior of the insured population resulting from higher deductible and co-insurance plans implemented by employers, which, in turn, has resulted in the deferral of elective and non-emergent procedures. Given the high rate of unemployment and its impact on the economy, particularly in the markets we serve, we expect the elevated levels in our self-pay and Medicaid payor mixes to continue until the U.S. economy experiences an economic recovery that includes job growth and a meaningful decline in unemployment.

State Medicaid Budgets

The states in which we operate have experienced budget constraints as a result of increased costs and lower than expected tax collections. Many states have experienced or project near term shortfalls in their budgets, and economic conditions may increase these budget pressures. Health and human services programs, including Medicaid and similar programs, represent a significant portion of state budgets. The states in which we operate, including Texas and Arizona, have responded to these budget concerns by decreasing funding for Medicaid and other healthcare programs, and by making structural changes that have resulted in a reduction in hospital reimbursement. In addition, many states are seeking waivers from the Centers for Medicare and Medicaid Services (“CMS”) in order to implement or expand their managed Medicaid programs. The Texas legislature and the Texas Health and Human Services Commission (“THHSC”) have recommended expanding managed Medicaid enrollment in the state. On December 12, 2011, CMS approved a Medicaid waiver that: (1) allows Texas to expand its managed Medicaid program, while preserving hospital funding; (2) provides incentive payments for healthcare improvements; and (3) directs more funding to hospitals that serve large numbers of uninsured patients.

In July 2011, in connection with the state of Texas’ reduced funding for Medicaid services in fiscal 2012, the THHSC issued a final rule implementing a statewide acute care hospital inpatient Standard Dollar Amount (“SDA”) rate, along with an 8% reduction in Medicaid hospital outpatient reimbursement. The THHSC also rebased all MS-DRG relative weights concurrent with this SDA rate change. The new statewide SDA rate includes certain add-on adjustments for geographic wage-index, indirect medical education and trauma services. However, the new statewide SDA rate does not include add-on adjustments for higher acuity services, such as neonatal and other women’s services, which are utilized by a majority of the Medicaid patients we serve at our Texas hospitals.

Arizona’s budget for fiscal year 2011 included a reduction in funding for Medicaid through the elimination of Medicaid coverage for certain services and a rate cut of up to 5% for all Medicaid providers, which began in April 2011. Included as part of the state’s fiscal 2012 budget legislation was an additional 5% cut to provider reimbursement effective October 1, 2011, and a state-wide reduction of approximately 120,000 eligible Medicaid beneficiaries, which represents approximately 9.5% of the total Medicaid population in the state and includes approximately 105,000 childless adults, both of which were recently approved by CMS under the confines of the Health Reform Law. This reduction in eligible enrollees is to be accomplished over a twelve month period, which began July 2011, through enrollment caps, attrition and more stringent eligibility requirements. Additionally, AHCCCS has implemented a tiered profit sharing plan, which will be administered through an annual reconciliation process with participating managed Medicaid health plans and will effectively limit our net profit margins for fiscal year 2012. If additional Medicaid spending cuts or other program changes are implemented in the future in Arizona or other states in which we operate, our revenue and earnings could be significantly impacted.

Value-Based Reimbursement

There is a trend in the healthcare industry towards value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting and financial incentives tied to the quality and efficiency of care provided by facilities. The Health Reform Law expands the use of value-based purchasing initiatives in federal healthcare programs. We expect programs of this type to become more common in the healthcare industry.

 

24


Table of Contents

Medicare requires providers to report certain quality measures in order to receive full reimbursement increases for inpatient and outpatient procedures that previously were awarded automatically. CMS has expanded, through a series of rulemakings, the number of patient care indicators that hospitals must report. Additionally, we anticipate that CMS will continue to expand the number of inpatient and outpatient quality measures. We have invested significant capital and resources in the implementation of our advanced clinical system that assists us in monitoring and reporting these quality measures. CMS makes the data submitted by hospitals, including our hospitals, public on its website.

Medicare no longer pays hospitals additional amounts for the treatment of certain preventable adverse events, also known as HACs, unless the conditions were present at admission. The Health Reform Law also prohibits the use of federal funds under the Medicaid program to reimburse providers for treating HACs. Further, beginning in federal fiscal year 2015, hospitals that rank in the worst 25% of all hospitals nationally for HACs in the previous year will receive reduced Medicare reimbursements. The Health Reform Law contains a number of other provisions that further tie reimbursement to quality and efficiency. For example, hospitals that have “excessive readmissions” for specified conditions will receive reduced reimbursement. In addition, the Health Reform Law requires the Department of Health and Human Services (the “Department”) to implement a value-based purchasing program for inpatient hospital services. Beginning in federal fiscal year 2013, the Department will reduce inpatient hospital payments for all discharges by a percentage specified by statute and pool the total amount collected from these reductions to fund payments to reward hospitals that meet or exceed certain quality performance standards established by the Department.

Many large commercial payors currently require providers to report quality data. Several commercial payors have announced that they will stop reimbursing hospitals for certain preventable adverse events. A number of state hospital associations have also announced policies addressing the waiver of patient bills for care related to a serious adverse event. In addition, managed care organizations may begin programs that condition payment on performance against specified measures. The quality measurement criteria used by commercial payors may be similar to or even more stringent than Medicare requirements.

We expect these trends towards value-based purchasing of healthcare services by Medicare and other payors to continue. Because of these trends, if we are unable to meet or exceed quality of care standards in our facilities, our operating results could be significantly impacted in the future.

Physician Alignment and Clinical Integration

In an effort to meet community needs and address coverage issues, we continue to seek alignment with physicians through various recruitment and employment strategies. Our ability to attract and retain skilled physicians to our hospitals is critical to our success and is affected by the quality of care at our hospitals. We believe intense efforts focusing on quality of care will enhance our ability to recruit and retain the skilled physicians necessary to make our hospitals successful. Furthermore, we believe that physician alignment promotes clinical integration, enhancing quality of care and making us more efficient and competitive in a healthcare environment trending toward value-based purchasing and pay-for-performance.

We experience certain risks associated with the integration of medical staffs at our hospitals. As we continue to focus on our physician employment strategy, we face significant competition for skilled physicians in certain of our markets as more hospital providers adopt a physician staffing model approach, coupled with a general shortage of physicians across most specialties. This increased competition has resulted in efforts by managed care organizations to align with certain provider networks in the markets in which we operate. While we expect that employing physicians should provide relief on cost pressures associated with on-call coverage and other professional fees, we anticipate incurring additional labor and other start-up related costs as we continue the integration of employed physicians.

We also face risk from competition for outpatient business. We expect to mitigate this risk through continued focus on our physician employment strategy, the development of new access points of care, our commitment to capital investment in our hospitals, including updated technology and equipment, and our commitment to our quality of care initiatives that some competitors, including individual physicians or physician groups, may not be equipped to implement.

 

25


Table of Contents

Uncompensated Care

Like others in the hospital industry, we continue to experience high levels of uncompensated care, including discounts to the uninsured, bad debts and charity care. These elevated levels are driven by the number of uninsured and under-insured patients seeking care at our hospitals, particularly in Arizona where the state has taken measures to reduce its Medicaid enrollment, the increased acuity levels at which these patients are presenting for treatment, primarily resulting from economic pressures and their related decisions to defer care, increasing healthcare costs and other factors beyond our control, such as increases in the amount of co-payments and deductibles as employers continue to pass more of these costs on to their employees. In addition, as a result of high unemployment and its continued impact on the economy, we believe that our hospitals may continue to experience high levels of or possibly growth in the level of uncompensated care they provide. During the quarter ended December 31, 2011, our uncompensated care as a percentage of acute care revenue was 19.9%, compared to 18.7% in the prior year quarter.

We continue to monitor our self-pay admissions on a daily basis and continue to focus on the efficiency of our emergency rooms, point-of-service cash collections, Medicaid eligibility automation and process-flow improvements. While we continue to be successful at qualifying many uninsured patients for Medicaid or other third-party coverage, which has helped to alleviate some of the pressure created from the growth in our uncompensated care, we continue to experience delays associated with the administrative functions of the Medicaid qualification process at the state levels. These delays are not indicative of eligibility issues, but rather staffing cut-backs as states continue working to address their budgetary issues.

We anticipate that if we experience further growth in uninsured volume and revenue over the near-term, including increased acuity levels and continued increases in co-payments and deductibles for insured patients, our uncompensated care will increase and our results of operations could be adversely affected.

The percentages of our insured and uninsured gross hospital receivables, net of discounts and contractual adjustments recorded at the time of billing (prior to allowances for contractual adjustments and doubtful accounts), are summarized as follows:

 

September 30, September 30,
       December 31,
2011
    September 30,
2011
 

Insured receivables

       59.1     59.5

Uninsured receivables

       40.9     40.5
    

 

 

   

 

 

 

Total

       100.0     100.0
    

 

 

   

 

 

 

The percentages of hospital receivables in summarized aging categories are as follows:

 

September 30, September 30,
       December 31,
2011
    September 30,
2011
 

0 to 90 days

       68.6     68.1

91 to 180 days

       18.9     19.3

Over 180 days

       12.5     12.6
    

 

 

   

 

 

 

Total

       100.0     100.0
    

 

 

   

 

 

 

Revenue and Volume Trends

Net revenue for the quarter ended December 31, 2011, increased 1.5% to $623.7 million, compared to $614.3 million in the prior year quarter. Net revenue is comprised of acute care revenue, which is recorded net of the provision for bad debts as required by newly adopted authoritative accounting guidance, and premium revenue. Acute care revenue, which includes the impact of the St. Joseph Medical Center (“St. Joseph”) acquisition effective May 1, 2011, contributed $60.9 million to the increase in net revenue for the quarter ended December 31, 2011, while premium revenue at Health Choice declined $51.5 million.

 

26


Table of Contents

Acute Care Revenue

Acute care revenue is comprised of net patient revenue and other revenue. A large percentage of our hospitals’ net patient revenue consists of fixed payment, discounted sources, including Medicare, Medicaid and managed care organizations. Reimbursement for Medicare and Medicaid services are often fixed regardless of the cost incurred or the level of services provided. Similarly, a greater percentage of the managed care companies we contract with reimburse providers on a fixed payment basis regardless of the costs incurred or the level of services provided. Net patient revenue is reported net of discounts and contractual adjustments. The contractual adjustments principally result from differences between the hospitals’ established charges and payment rates under Medicare, Medicaid and various managed care plans. Additionally, discounts and contractual adjustments result from our uninsured discount and charity care programs. Due to accounting guidance effective October 1, 2011, net patient revenue is now reported net of the provision for doubtful accounts. Other revenue includes medical office building rental income and other miscellaneous revenue.

Certain of our acute care hospitals receive supplemental Medicaid reimbursement, including reimbursement from programs for participating private hospitals that enter into indigent care affiliation agreements with public hospitals or county governments in the state of Texas. Under the CMS-approved programs, affiliated hospitals, including our Texas hospitals, have expanded the community healthcare safety net by providing indigent healthcare services. Participation in indigent care affiliation agreements by our Texas hospitals has resulted in additional acute care revenue by virtue of the hospitals’ entitlement to supplemental Medicaid inpatient reimbursement. Revenue recognized under these Texas private supplemental Medicaid reimbursement programs for the quarter ended December 31, 2011, was $19.7 million, compared to $17.3 million in the prior year quarter. The Texas private supplemental Medicaid reimbursement programs are currently being reviewed by the THHSC, which, on December 12, 2011, received CMS approval of a waiver allowing Texas to continue receiving supplemental Medicaid reimbursement while expanding its Medicaid managed care program. Due to the recent approval of the Medicaid waiver and the nature of ongoing deliberations with advocacy groups, we are unable to estimate the impact, if any, this will have on our revenue and earnings.

Admissions and adjusted admissions increased 20.7% and 17.9%, respectively, for the quarter ended December 31, 2011, compared to the prior year quarter. On a same-facility basis, admissions and adjusted admissions increased 4.7% and 3.4%, respectively, for the quarter ended December 31, 2011, compared to the prior year quarter.

On a same-facility basis, our volume has benefitted from increases in inpatient surgeries, which increased 1.9% for the quarter ended December 31, 2011, and sub-acute services, including psychiatric and rehabilitation care, which increased 11.9% for the same period, respectively, each compared to the prior year quarter. Despite these improvements, hospital volumes continue to be negatively impacted, in part, by an overall industry-wide decline in obstetric related services, the impact of high unemployment and patient decisions to defer or cancel elective procedures, general primary care and other non-emergent healthcare procedures until their conditions become more acute, all resulting from the impact of the current economic environment. The deferral of non-emergent procedures has also been facilitated by an increase in the number of high deductible employer sponsored health plans, which ultimately shifts more of the medical cost responsibility onto the patient.

We believe our volumes over the long-term will grow as a result of our business strategies, including the strategic deployment of capital, the continued investment in our physician alignment strategy, the development of increased access points of care, including physician clinics, urgent care centers, outpatient imaging centers and ambulatory surgery centers, our increased marketing efforts to promote our commitment to quality and patient satisfaction, and the general aging of the population.

The sources of our net patient revenue by payor are summarized as follows, and are reflected before of the provision for bad debts:

 

September 30, September 30,
       Quarter
Ended December  31,
 
       2011     2010  

Medicare

       23.8     23.8

Managed Medicare

       7.3     8.2

Medicaid and managed Medicaid

       15.5     13.8

Managed care and other

       39.6     40.0

Self-pay

       13.8     14.2
    

 

 

   

 

 

 

Total

       100.0     100.0
    

 

 

   

 

 

 

Our net patient revenue payor mix for the quarter ended December 31, 2011, is impacted by the St. Joseph acquisition, which includes a higher percentage of Medicaid and managed Medicaid.

 

27


Table of Contents

Net patient revenue per adjusted admission, which includes the impact of the provision for bad debts as a component of acute care revenue, decreased 3.0% for the quarter ended December 31, 2011, compared to the prior year quarter. On a same-facility basis, net patient revenue per adjusted admission decreased 1.2% for the quarter ended December 31, 2011, compared to the prior year quarter. While we continue to receive rate increases from our managed care payors, our overall pricing has been negatively affected by the impact of high unemployment and other industry pressures, which has resulted in increased bad debt expense and reductions in Medicaid funding as states address their budgeting issues by implementing rate cuts on providers, which has caused a decline in pricing related to Medicaid and managed Medicaid volumes. As states continue working through their budgetary issues, any additional cuts to Medicaid funding would negatively impact our future pricing and earnings.

See “Item 1 — Business — Sources of Acute Care Revenue” and “Item 1 — Business — Government Regulation and Other Factors” included in our Annual Report on Form 10-K filed with the SEC on December 21, 2011, for a description of the types of payments we receive for services provided to patients enrolled in the traditional Medicare plan, managed Medicare plans, Medicaid plans, managed Medicaid plans and managed care plans. In those sections, we also discussed the unique reimbursement features of the traditional Medicare plan, including the annual Medicare regulatory updates published by CMS that impact reimbursement rates for services provided under the plan. The future potential impact to reimbursement for certain of these payors under the Health Reform Law is also addressed in such Annual Report on Form 10-K.

Premium Revenue

Most of the premium revenue at Health Choice is derived through a contract with AHCCCS to provide specified health services to qualified Medicaid enrollees through contracted providers. AHCCCS is the state agency that administers Arizona’s Medicaid program. The contract requires Health Choice to arrange for healthcare services for enrolled Medicaid patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates, and supplemental payments from AHCCCS. Health Choice also contracts with CMS to provide coverage as a Medicare Advantage Prescription Drug (“MAPD”) Special Needs Plan (“SNP”). This contract allows Health Choice to offer Medicare and Part D drug benefit coverage to new and existing dual-eligible members (i.e., those that are eligible for Medicare and Medicaid). Effective for this 2012 plan year, SNPs are required to meet additional CMS requirements, including requirements relating to model of care, cost-sharing, disclosure of information and reporting of quality measures.

Premium revenue generated under the AHCCCS and CMS contracts with Health Choice represented 23.9% of our consolidated net revenue for the quarter ended December 31, 2011, compared to 32.9% in the prior year quarter. The decline in premium revenue as a percentage of consolidated net revenue is the result of our recent St. Joseph acquisition and a loss of covered lives in our Medicaid product line, which declined approximately 5.4% for the quarter ended December 31, 2011, compared to the prior year quarter. The loss in membership in our Medicaid product line is the result of efforts by the state of Arizona to balance its budget, which includes the implementation of a plan to reduce its Medicaid enrollees, particularly related to childless adults, by approximately 9.5% during its 2012 fiscal year. As a result of these measures, we anticipate further reductions in premium revenue and earnings at Health Choice during our 2012 fiscal year.

Health Choice operates in what is currently a difficult state budgetary environment in Arizona. As of October 1, 2011, AHCCCS implemented a tiered profit sharing plan, which followed two recently enacted 5% cuts in hospital reimbursement rates for services provided to state Medicaid enrollees. One hospital association has filed suit against AHCCCS in federal court, alleging that the rate cuts leave hospitals with reimbursement rates significantly below actual cost of services in violation of federal law. We cannot provide any assurances that such litigation or similar efforts to prevent such rate cuts will be successful.

 

28


Table of Contents

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A summary of significant accounting policies is disclosed in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2011. Our critical accounting policies are further described under the caption “Critical Accounting Policies and Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. There have been no changes in the nature of our critical accounting policies or the application of those policies since September 30, 2011.

SELECTED OPERATING DATA

The following table sets forth certain unaudited operating data for each of the periods presented.

 

September 30, September 30,
       Quarter
Ended December 31,
 
       2011     2010  

Acute Care:

      

Number of acute care hospital facilities at end of period

       18        17   

Licensed beds at end of period (1)

       4,365        3,573   

Average length of stay (days) (2)

       4.9        4.9   

Occupancy rates (average beds in service)

       48.9     45.3

Admissions (3)

       31,634        26,202   

Adjusted admissions (4)

       53,421        45,312   

Patient days (5)

       154,810        127,807   

Adjusted patient days (4)

       252,163        211,696   

Net patient revenue per adjusted admission (6)

     $ 8,739      $ 9,009   

Same-Facility Acute Care (7):

      

Number of acute care hospital facilities at end of period

       17        17   

Licensed beds at end of period (1)

       3,573        3,573   

Average length of stay (days) (2)

       4.9        4.9   

Occupancy rates (average beds in service)

       47.7     45.3

Admissions (3)

       27,422        26,202   

Adjusted admissions (4)

       46,854        45,312   

Patient days (5)

       133,769        127,807   

Adjusted patient days (4)

       219,355        211,696   

Net patient revenue per adjusted admission (6)

     $ 8,902      $ 9,009   

Health Choice:

      

Medicaid covered lives

       182,647        193,126   

Dual-eligible lives (8)

       4,213        4,332   

Medical loss ratio (9)

       83.5     86.1

 

(1) Includes St. Luke’s Behavioral Hospital.

 

(2) Represents the average number of days that a patient stayed in our hospitals.

 

(3) Represents the total number of patients admitted to our hospitals for stays in excess of 23 hours. Management and investors use this number as a general measure of inpatient volume.

 

(4) Adjusted admissions and adjusted patient days are general measures of combined inpatient and outpatient volume. We compute adjusted admissions/patient days by multiplying admissions/patient days by gross patient revenue and then dividing that number by gross inpatient revenue.

 

(5) Represents the number of days our beds were occupied by inpatients over the period.

 

(6) Includes the impact of the provision for bad debts as a component of revenue resulting from the adoption of recent authoritative accounting guidance.

 

(7) Excludes the impact of the St. Joseph acquisition, which was effective May 1, 2011.

 

(8) Represents members eligible for Medicare and Medicaid benefits under Health Choice’s contract with CMS to provide coverage as a MAPD SNP.

 

(9) Represents medical claims expense as a percentage of premium revenue, including claims paid to our hospitals.

 

29


Table of Contents

RESULTS OF OPERATIONS SUMMARY

Consolidated

The following table sets forth, for the periods presented, our results of consolidated operations expressed in dollar terms and as a percentage of net revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.

 

September 30, September 30, September 30, September 30,
       Quarter Ended
December 31, 2011
    Quarter Ended
December 31, 2010
 

($ in thousands)

     Amount      Percentage     Amount      Percentage  

Net revenue:

            

Acute care revenue, net (1)

     $ 472,935         76.1   $ 412,074         67.1

Premium revenue

       150,738         23.9     202,192         32.9
    

 

 

    

 

 

   

 

 

    

 

 

 

Net revenue

       623,673         100.0     614,266         100.0

Costs and expenses:

            

Salaries and benefits

       223,964         35.9     189,913         31.0

Supplies

       84,170         13.5     76,436         12.5

Medical claims

       124,245         19.9     171,334         27.9

Rentals and leases

       12,266         2.0     11,166         1.8

Other operating expenses

       113,983         18.3     97,126         15.8

Medicaid EHR incentive payments

       (6,677      (1.1 %)      —             

Interest expense, net

       34,940         5.6     16,877         2.7

Depreciation and amortization

       28,534         4.6     24,046         3.9

Management fees

       1,250         0.2     1,250         0.2
    

 

 

    

 

 

   

 

 

    

 

 

 

Total costs and expenses

       616,675         98.9     588,148         95.8

Earnings from continuing operations before gain on disposal of assets and income taxes

       6,998         1.1     26,118         4.2

Gain on disposal of assets, net

       240         0.0     345         0.0
    

 

 

    

 

 

   

 

 

    

 

 

 

Earnings from continuing operations before income taxes

       7,238         1.1     26,463         4.2

Income tax expense

       3,605         0.5     9,189         1.5
    

 

 

    

 

 

   

 

 

    

 

 

 

Net earnings from continuing operations

       3,633         0.6     17,274         2.7

Loss from discontinued operations, net of income taxes

       (48      0.0     (3,208      (0.5 )% 
    

 

 

    

 

 

   

 

 

    

 

 

 

Net earnings

       3,585         0.6     14,066         2.2

Net earnings attributable to non-controlling interests

       (2,232      (0.4 %)      (2,320      (0.3 %) 
    

 

 

    

 

 

   

 

 

    

 

 

 

Net earnings attributable to IASIS Healthcare LLC

     $ 1,353         0.2   $ 11,746         1.9
    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Acute care revenue is net of the provision for bad debts.

 

30


Table of Contents

Acute Care

The following table and discussion sets forth, for the periods presented, the results of our acute care operations expressed in dollar terms and as a percentage of acute care revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.

 

September 30, September 30, September 30, September 30,
       Quarter Ended
December 31, 2011
    Quarter Ended
December 31, 2010
 

($ in thousands)

     Amount      Percentage     Amount        Percentage  

Acute care revenue:

              

Acute care revenue, net (1)

     $ 472,935         99.7   $ 412,074           99.4

Revenue between segments (2)

       1,629         0.3     2,660           0.6
    

 

 

    

 

 

   

 

 

      

 

 

 

Acute care revenue, net

       474,564         100.0     414,734           100.0

Costs and expenses:

              

Salaries and benefits

       218,837         46.1     184,890           44.6

Supplies

       84,119         17.7     76,392           18.4

Rentals and leases

       11,886         2.5     10,722           2.6

Other operating expenses

       108,297         22.8     90,830           21.9

Medicaid EHR incentive payments

       (6,677      (1.4 %)      —             —     

Interest expense, net

       34,940         7.4     16,877           4.0

Depreciation and amortization

       27,656         5.8     23,151           5.6

Management fees

       1,250         0.3     1,250           0.3
    

 

 

    

 

 

   

 

 

      

 

 

 

Total costs and expenses

       480,308         101.2     404,112           97.4

Earnings (loss) from continuing operations before gain on disposal of assets and income taxes

       (5,744      (1.2 )%      10,622           2.6

Gain on disposal of assets, net

       240         0.0     345           0.0
    

 

 

    

 

 

   

 

 

      

 

 

 

Earnings (loss) from continuing operations before income taxes

     $ (5,504      (1.2 )%    $ 10,967           2.6
    

 

 

    

 

 

   

 

 

      

 

 

 

 

(1) Acute care revenue is net of the provision for bad debts.

 

(2) Revenue between segments is eliminated in our consolidated results.

Quarters Ended December 31, 2011 and 2010

Acute care revenue — Acute care revenue for the quarter ended December 31, 2011, was $474.6 million, an increase of $59.8 million or 14.4%, compared to $414.7 million in the prior year quarter. The increase in acute care revenue, which includes the impact of the St. Joseph acquisition, is comprised of an increase in adjusted admissions of 17.9%, offset by a decrease in net patient revenue per adjusted admission of 3.0%, which is primarily the result of reductions in Medicaid reimbursement and increased bad debts. For the quarter ended December 31, 2011, self-pay admissions as a percentage of total admissions increased to 7.2%, compared to 6.0% in the prior year quarter.

Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in acute care revenue of $78,000 and $1.4 million for the quarters ended December 31, 2011 and 2010, respectively.

Salaries and benefits — Salaries and benefits expense for the quarter ended December 31, 2011, was $218.8 million, or 46.1% of acute care revenue, compared to $184.9 million, or 44.6% of acute care revenue in the prior year quarter. Salaries and benefits expense as a percentage of acute care revenue increased by 1.0% resulting from the pressures on acute care revenue related to reductions in Medicaid reimbursement and increased bad debt expense. The remaining increase is due to the expansion of our employed physician base, which requires additional investments in labor and practice-related costs, including infrastructure and physician support staff.

Supplies — Supplies expense for the quarter ended December 31, 2011, was $84.1 million, or 17.7% of acute care revenue, compared to $76.4 million, or 18.4% of acute care revenue in the prior year quarter. The decrease in supplies expense as a percentage of acute care revenue is primarily the result of a 36.6% increase in our sub-acute services, including psychiatric and rehabilitation care, which includes the impact of our recent St. Joseph acquisition.

 

31


Table of Contents

Other operating expenses — Other operating expenses for the quarter ended December 31, 2011, were $108.3 million, or 22.8% of acute care revenue, compared to $90.8 million, or 21.9% of acute care revenue in the prior year quarter. The increase in other operating expenses as a percentage of acute care revenue is due to an increase in insurance costs, repairs and maintenance and purchase services, including information technology costs, all which increased a combined 0.9% for the quarter ended December 31, 2011, compared to the prior year quarter.

Interest expense — Interest expense for the quarter ended December 31, 2011, was $34.9 million, compared to $16.9 million in the prior year quarter. The increase in our interest expense is due to our refinancing transaction during the third quarter of fiscal 2011.

Health Choice

The following table and discussion sets forth, for the periods presented, the results of our Health Choice operations expressed in dollar terms and as a percentage of premium revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.

 

September 30, September 30, September 30, September 30,
       Quarter Ended
December 31, 2011
    Quarter Ended
December 31, 2010
 

($ in thousands)

     Amount        Percentage     Amount        Percentage  

Premium revenue:

                

Premium revenue

     $ 150,738           100.0   $ 202,192           100.0

Costs and expenses:

                

Salaries and benefits

       5,127           3.4     5,023           2.5

Supplies

       51           0.0     44           0.0

Medical claims (1)

       125,874           83.5     173,994           86.1

Other operating expenses

       5,686           3.8     6,296           3.1

Rentals and leases

       380           0.3     444           0.2

Depreciation and amortization

       878           0.6     895           0.4
    

 

 

      

 

 

   

 

 

      

 

 

 

Total costs and expenses

       137,996           91.5     186,696           92.3
    

 

 

      

 

 

   

 

 

      

 

 

 

Earnings before income taxes

     $ 12,742           8.5   $ 15,496           7.7
    

 

 

      

 

 

   

 

 

      

 

 

 

 

(1) Medical claims paid to our hospitals of $1.6 million and $2.7 million for the quarters ended December 31, 2011 and 2010, respectively, are eliminated in our consolidated results.

Quarters Ended December 31, 2011 and 2010

Premium revenue — Premium revenue from Health Choice was $150.7 million for the quarter ended December 31, 2011, a decrease of $51.5 million or 25.4%, compared to $202.2 million in the prior year quarter. The decline in premium revenue is primarily impacted by the efforts of the state of Arizona to reduce its Medicaid enrollment, particularly related to childless adults, which has resulted in a 7.0% decline in member months, and lower capitation rates on a per member per month basis, as the mix of enrollees served changes to included fewer childless adults, which typically receive a higher capitation rate on a monthly basis. Additionally, premium revenue has been impacted by two 5% provider rate reductions that were implemented effective April 1 and October 1, 2011.

Medical claims — Prior to eliminations, medical claims expense was $125.9 million for the quarter ended December 31, 2011, compared to $174.0 million in the prior year quarter. Medical claims expense as a percentage of premium revenue was 83.5% for the quarter ended December 31, 2011, compared to 86.1% in the prior year quarter. The decrease in medical claims as a percentage of premium revenue is impacted primarily by the loss of childless adult lives from its membership rolls, which typically result in higher medical claims costs per member, as well as a decline in general medical utilization, improvements in care management and other operational initiatives.

 

32


Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

Overview of Cash Flow Activities for the Quarters Ended December 31, 2011 and 2010

Our cash flows are summarized as follows (in thousands):

 

September 30, September 30,
       Quarter
Ended December 31,
 
       2011      2010  

Cash flows from operating activities

     $ (32,701    $ 6,482   

Cash flows from investing activities

     $ (22,584    $ (16,725

Cash flows from financing activities

     $ (8,046    $ (5,022

Operating Activities

Operating cash flows decreased $39.2 million for the quarter ended December 31, 2011, compared to the prior year quarter. The decrease is due primarily to temporary delays in the settlement of accounts receivable with certain Medicaid and managed care payors, an increase in cash interest paid resulting from our fiscal 2011 refinancing transaction and payment of our fiscal 2011 incentive compensation accrual.

At December 31, 2011, we had $233.7 million in net working capital, compared to $225.1 million at September 30, 2011. Net accounts receivable increased $25.7 million to $303.6 million at December 31, 2011, from $277.9 million at September 30, 2011. Our days revenue in accounts receivable at December 31, 2011 were 51, compared to 47 at September 30, 2011, and 47 at December 31, 2010.

Investing Activities

Capital expenditures for the quarter ended December 31, 2011, were $24.4 million, compared to $15.4 million in the prior year quarter.

Financing Activities

During the quarter ended December 31, 2011, pursuant to the terms of our senior secured credit facilities, we made principal payments totaling $2.6 million, compared to $1.5 million in the prior year. Additionally, we paid $1.1 million in capital leases and other long-term debt obligations during the quarter ended December 31, 2011, compared to $460,000 in the prior year.

 

33


Table of Contents

Capital Resources

As of December 31, 2011, we had the following debt arrangements:

 

   

$1.325 billion senior secured credit facilities; and

 

   

$850.0 million in 8.375% senior notes due 2019.

At December 31, 2011, amounts outstanding under our senior secured credit facilities consisted of $1.017 billion in term loans. In addition, we had $85.6 million in letters of credit outstanding under the revolving credit facility. The weighted average interest rate of outstanding borrowings under the senior secured credit facilities was 5.0% and 3.4% for the quarters ended December 31, 2011 and 2010, respectively.

$1.325 Billion Senior Secured Credit Facilities

We are party to a senior credit agreement (the “Restated Credit Agreement”). The Restated Credit Agreement provides for senior secured financing of up to $1.325 billion consisting of (1) a $1.025 billion senior secured term loan facility with a seven-year maturity and (2) a $300.0 million senior secured revolving credit facility with a five-year maturity, of which up to $150.0 million may be utilized for the issuance of letters of credit (together, the “Senior Secured Credit Facilities”). Principal under the senior secured term loan facility is due in consecutive equal quarterly installments in an aggregate annual amount equal to 1% of the original principal amount of $1.025 billion, with the remaining balance due upon maturity of the senior secured term loan facility. The senior secured revolving credit facility does not require installment payments.

Borrowings under the senior secured term loan facility bear interest at a rate per annum equal to, at our option, either (1) a base rate (the “base rate”) determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A. and (c) a one-month LIBOR rate, subject to a floor of 1.25%, plus 1.00%, in each case, plus a margin of 2.75% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, subject to a floor of 1.25%, plus a margin of 3.75% per annum. Borrowings under the senior secured revolving credit facility generally bear interest at a rate per annum equal to, at our option, either (1) the base rate plus a margin of 2.50% per annum, or (2) the LIBOR rate for the interest period relevant to such borrowing plus a margin of 3.50% per annum. In addition to paying interest on outstanding principal under the Senior Secured Credit Facilities, we are required to pay a commitment fee on the unutilized commitments under the senior secured revolving credit facility, as well as pay customary letter of credit fees and agency fees.

The Senior Secured Credit Facilities are unconditionally guaranteed by IAS and certain of our subsidiaries (collectively, the “Credit Facility Guarantors”) and are required to be guaranteed by all of our future material wholly owned subsidiaries, subject to certain exceptions. All obligations under the Restated Credit Agreement are secured, subject to certain exceptions, by substantially all of our assets and the assets of the Credit Facility Guarantors, including (1) a pledge of 100% of our equity interests and that of the Credit Facility Guarantors, (2) mortgage liens on all of our material real property and that of the Credit Facility Guarantors, and (3) all proceeds of the foregoing.

The Restated Credit Agreement requires us to mandatorily prepay borrowings under the senior secured term loan facility with net cash proceeds of certain asset dispositions, following certain casualty events, following certain borrowings or debt issuances, and from a percentage of annual excess cash flow.

The Restated Credit Agreement contains certain restrictive covenants, including, among other things: (1) limitations on the incurrence of debt and liens; (2) limitations on investments other than, among other exceptions, certain acquisitions that meet certain conditions; (3) limitations on the sale of assets outside of the ordinary course of business; (4) limitations on dividends and distributions; and (5) limitations on transactions with affiliates, in each case, subject to certain exceptions. The Restated Credit Agreement also contains certain customary events of default, including, without limitation, a failure to make payments under the Senior Secured Credit Facilities, cross-defaults, certain bankruptcy events and certain change of control events.

 

34


Table of Contents

8.375% Senior Notes due 2019

We and IASIS Capital Corporation (together, the “Issuers”) issued $850.0 million aggregate principal amount of 8.375% senior notes due 2019 (the “Senior Notes”), which mature on May 15, 2019, pursuant to an indenture, dated as of May 3, 2011, among the Issuers and certain of the Issuers’ wholly owned domestic subsidiaries that guarantee the Senior Secured Credit Facilities (the “Notes Guarantors”) (the “Indenture”). The Indenture provides that the Senior Notes are general unsecured, senior obligations of the Issuers, and initially will be unconditionally guaranteed on a senior unsecured basis.

The Senior Notes bear interest at a rate of 8.375% per annum, payable semi-annually, in cash in arrears, on May 15 and November 15 of each year.

We may redeem the Senior Notes, in whole or in part, at any time prior to May 15, 2014, at a price equal to 100% of the aggregate principal amount of the Senior Notes plus a “make-whole” premium and accrued and unpaid interest and special interest, if any, to but excluding the redemption date. In addition, we may redeem up to 35% of the Senior Notes before May 15, 2014, with the net cash proceeds from certain equity offerings at a redemption price equal to 108.375% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date, subject to compliance with certain conditions.

The Indenture contains covenants that limit our (and our restricted subsidiaries’) ability to, among other things: (1) incur additional indebtedness or liens or issue disqualified stock or preferred stock; (2) pay dividends or make other distributions on, redeem or repurchase our capital stock; (3) sell certain assets; (4) make certain loans and investments; (5) enter into certain transactions with affiliates; (5) impose restrictions on the ability of a subsidiary to pay dividends or make payments or distributions to us and our restricted subsidiaries; and (6) consolidate, merge or sell all or substantially all of our assets. These covenants are subject to a number of important limitations and exceptions.

The Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately. If we experience certain kinds of changes of control, we must offer to purchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest and special interest, if any, to but excluding the repurchase date. Under certain circumstances, we will have the ability to make certain payments to facilitate a change of control transaction and to provide for the assumption of the Senior Notes by a new parent company resulting from such change of control transaction. If such change of control transaction is facilitated, the Issuers will be released from all obligations under the Indenture and the Issuers and the trustee will execute a supplemental indenture effectuating such assumption and release.

Credit Ratings

The table below summarizes our corporate rating, as well as our credit ratings for the Senior Secured Credit Facilities and Senior Notes as of the date of this filing:

 

September 30, September 30,
       Moody’s      Standard & Poor’s

Corporate credit

     B2      B

Senior secured term loan facility

     Ba3      B

Senior secured revolving credit facility

     Ba3      BB-

8.375% senior notes due 2019

     Caa1      CCC+

Outlook

     Stable      Stable

Other

In March 2009, we executed interest rate swap agreements with Citibank, N.A. (“Citibank”) and Wachovia Bank, N.A. (currently Wells Fargo Bank, N.A.), as counterparties, with notional amounts totaling $425.0 million, of which $225.0 million expired on February 28, 2011. As of December 31, 2011, two interest rate swap agreements remain in effect with each agreement having a notional amount of $100.0 million expiring on February 29, 2012. Under the remaining agreements, we are required to make monthly fixed rate payments to the counterparties, as calculated on the notional amounts, at an annual fixed rate of 2.0%. The counterparties are obligated to make monthly floating rate payments to us based on the one-month LIBOR rate.

 

35


Table of Contents

In August 2011, we executed forward starting interest rate swaps with Citibank and Barclays Bank PLC (“Barclays”), as counterparties, with notional amounts totaling $350.0 million, each agreement effective March 31, 2013 and expiring between September 30, 2014 and September 30, 2016. Under these agreements, we will be required to make quarterly fixed rate payments to the counterparties at annual rates ranging from 1.6% to 2.2%. The counterparties will be obligated to make quarterly floating rate payments to us based on the three-month LIBOR rate, each subject to a floor of 1.25%. Additionally, in August 2011, we executed an interest rate cap with Citibank, as counterparty, with a notional amount of $350.0 million and a cap rate of 1.75%, effective March 1, 2012 and expiring March 31, 2013.

Capital Expenditures

We plan to finance our proposed capital expenditures with cash generated from operations, borrowings under our Senior Secured Credit Facilities and other capital sources that may become available. We expect our capital expenditures for fiscal 2012 to be $140.0 million to $150.0 million, including the following significant expenditures:

 

   

$65.0 million to $70.0 million for growth and new business projects;

 

   

$30.0 million to $35.0 million in replacement or maintenance related projects at our hospitals; and

 

   

$45.0 million in hardware and software costs related to information systems projects, including healthcare IT stimulus initiatives.

Liquidity

We rely on cash generated from our operations as our primary source of liquidity, as well as available credit facilities, project and bank financings and the issuance of long-term debt. From time to time, we have also utilized operating lease transactions that are sometimes referred to as off-balance sheet arrangements. We expect that our future funding for working capital needs, capital expenditures, long-term debt repayments and other financing activities will continue to be provided from some or all of these sources. Each of our existing and projected sources of cash is impacted by operational and financial risks that influence the overall amount of cash generated and the capital available to us. For example, cash generated by our business operations may be impacted